Q1: Sure Bets That Weren’t

Doug Nolan 

An intriguing first quarter. The year began with bullish exuberance for the Trump policy agenda. With the GOP finally in control of Washington, there was now little in the way of healthcare reform, tax cuts/reform, infrastructure spending and a full-court press against regulation. As Q1 drew to a close, by most accounts our new Executive Branch is a mess - the old Washington swamp as stinky a morass as ever. And, in spite of it all, the global bull market marched on undeterred. Everyone’s still dancing. From my perspective, there’s confirmation that the risk market rally has been more about rampant global liquidity excess and speculative Market Dynamics than prospects for U.S. policy change.

It’s not as if market developments unfolded as anticipated. Key “Trump trades” stumbled – longs and shorts across various markets. The overly Crowded king dollar faltered, with the Dollar Index down 2.0% during Q1. The Mexican peso reversed course and ended the quarter up 10.6% versus the dollar, at the top of the global currency leaderboard. The Japanese yen - another popular short and a key funding instrument for global carry trades – jumped 5% . China’s renminbi gained 0.84% versus the dollar. WSJ headline: “A Soaring Dollar and Falling Yuan: The Sure Bets That Weren’t”

Shorting Treasuries was another Trump Trade Sure Bet That Wasn’t. And while 10-year yields jumped to a high of 2.63% on March 13, yields ended the quarter down six bps from yearend to 2.39%. Despite a less dovish Fed, a hike pushed forward to March, and even talk of shrinking the Federal Reserve’s balance sheet - bond yields were notably sticky. Corporate debt enjoyed a solid quarter. Investment grade bonds (LQD) gained 1.2% during the quarter, with high-yield (HYG) returning 2.3%.

The S&P500 gained 5.5% during Q1. And while most were positioned bullishly, I suspect many hedge funds (and fund managers generally) will be disappointed with Q1 performance. There was considerable Trump Trade enthusiasm for the higher beta small caps and broader market. Badly lagging the S&P500, it took a 2.3% rise in the final week of the quarter to see the small cap Russell 2000 rise 2.1% in Q1. The mid caps (MID) were only somewhat better, rising 3.6%.

Technology stocks had been low on the list of Trump Trades going into the quarter, perhaps helping to explain a gangbuster Q1 in the markets. The popular QQQ ETF (Nasdaq100) returned 12.0% during Q1. The Morgan Stanley High Tech index rose 13.5%, and the Semiconductors jumped 11.6%. The Biotechs (BTK) surged 16.0%.

A Trump Trade darling entering 2017, the financials struggled during Q1. March’s 4.0% decline reduced the bank stocks’ (BKX) Q1 gain to an unimpressive 0.3%. Somewhat lagging the S&P500, the broker/dealers (XBD) posted a 5.4% Q1 advance. The NYSE Financial Index gained 3.7%, while the Nasdaq Bank Index dropped 3.1%.

King dollar bullishness had investors underweight the emerging markets (EM) going into 2017. A weakening dollar coupled with huge January Chinese Credit growth helped spur a decent EM short squeeze. Outperformance then attracted the performance-chasing Crowd. By the end of March, EM (EEM up 12.5%) had enjoyed the best quarter in five years (from FT).

March 31 – Financial Times: “Capital flows to emerging markets have continued to surge ahead after a strong start to the year, with cross-border portfolio flows in March at their highest monthly level since January 2015 and broad capital flows to China turning positive in February for the first time in almost three years, according to the Institute of International Finance. The IIF… said flows from non-resident investors into EM bonds and equities were an estimated $29.8bn in March, up from $17.2bn in February…”

A Bloomberg headline from the final day of the quarter: “Rupee Caps Best First Quarter Since 1975 Amid $12 Billion Inflow.” India’s equities (Sensex) posted an 11.2% Q1 gain. A short squeeze also helped Turkish stocks (Borsa Istanbul) to a 13.8% first quarter rise. Latin American equities enjoyed a spectacular start to 2017. Stocks rose 6.4% in Mexico, 8.0% in Brazil, 15.2% in Chile and 19.2% in Argentina. With the notable exception of Russia, Eastern Europe’s equities also enjoyed a solid Q1.

March 31 – Bloomberg (Lilian Karunungan): “All of Asia’s emerging-market currencies, apart from the Philippine peso, strengthened this quarter as optimism over the region’s economic outlook lured inflows. India’s rupee led the advance in March. Regional equities had their best three months since 2010.”

Chinese stocks for the most part posted a solid Q1, with the Shanghai Composite gaining 3.8%. China’s growth-oriented ChiNext index declined 2.8%. Stocks gained 6.0% in Taiwan, 6.6% in South Korea, 5.1% in Indonesia, 6.0% in Malaysia, 6.9% in the Philippines and 8.6% in Vietnam.

Europe lavished in boundless free "money."  Germany’s DAX equites index jumped 7.3% and Frances’s CAC40 gained 5.4%, yet bigger gains were enjoyed in the Periphery. Spanish stocks surged 11.9%. The Italian Mid Cap index surged 17.5%. Portuguese stocks rose 8.1%.

The quarter, however, was not kind to European periphery sovereign debt. Notably, Italian 10-year yields jumped 51 bps. Spanish and French yields rose 29 bps, and Portuguese yields gained 23 bps. With German bund yields rising only 12 bps, European debt spreads widened meaningfully.

For the most part, Bubbling equities markets only exacerbated already extremely loose global financial conditions. First quarter U.S. high-grade debt issuance jumped to $393bn, up 9% from last year’s record pace. Led by record U.S. corporate debt sales, debt issuance boomed around the globe.

March 30 – Financial Times (James Kynge and Thomas Hale): “Emerging market countries sold record levels of government debt in the first quarter of this year, taking advantage of a surge in optimism towards the developing world as trade grows at its fastest rate for seven years and inflationary pressures ebb. Data from Dealogic, a research firm, show that sovereign bond sales from emerging markets rose to $69.6bn in the first three months of the year, an increase of 48 per cent from a year ago and a record amount for a single quarter. Corporate bond sales by companies in developing countries also surged, rising 135% year on year in the first quarter to $105bn…”

March 21 – Dealogic (Olga Tarabrina): “Global M&A volume has reached $705.0bn in 2017 YTD, surpassing $700bn in a YTD period for the first time since 2007 ($903.5bn). Of this, a total of 125 $1bn+ deals, worth $454.9bn, have been announced so far this year, compared to only 94 deals (totaling $260.3bn) 5 years ago. $10bn+ deals account for $167.2bn of the total this year… US-based companies are on top of the heap of cross-border deals, with $95.8 billion in announced acquisitions so far – “the highest YTD level on record.’ … For the first quarter, ‘14 times EBITDA is what the Dealogic figures show as the median EBITDA multiple,’ explained Dealogic’s head of M&A Research, Chunshek Chan. ‘That’s something we really haven’t seen over the course of the data that we have. Historically, we’ve been bouncing between 10 and 12 times, sometimes even 13 times. So 14 times EBITDA is certainly a premium to pay for acquisitions.’”

Various indicators of bullish market sentiment went to extremes. An incredible $124bn flooded into ETFs during the first two months of the year. Margin debt jumped to an all-time high ($528bn) in February, although this pales in comparison to the amount of leverage embedded in derivative trades.

March 31 – Bloomberg (Cecile Vannucci): “Just a week ago, it looked as if the dormant CBOE Volatility Index was awakening. Fast-forward five days, and the gauge known as the VIX is closing in on its lowest quarterly average since the final months of 2006. The measure has lost 18% this year through Thursday as the S&P 500 Index climbed 5.8%.”

March 28 – Bloomberg (Vince Golle): “Americans haven’t been this upbeat about the U.S. stock market since 2000, according to the Conference Board’s latest consumer confidence report… More than 47% of respondents said they expect equities to move higher in the next 12 months, the largest share since January 2000.”

March 23 – CNBC (Evelyn Cheng): “Investor sentiment jumped to a 16-year high in the first quarter, according to the latest Wells Fargo/Gallup Investor and Retirement Optimism Index. The index… rose 30 points to hit 126 in the first quarter… The last time the optimism index was higher was during the tech bubble in November 2000, when the index was at 130.”

The U.S. economy appeared to struggle during the quarter to keep up with booming confidence. University of Michigan Consumer Confidence - Current Conditions jumped to the highest level since July 2005. The Conference Board consumer confidence index surged to the highest level since December 2000. Small business confidence rose to the highest level since 2004.

On the other side of the world, China’s Credit-induced boom caught some momentum. Led by January’s record $545bn expansion of Total Social Financing, total Chinese Credit growth likely exceeded $1.0 TN during Q1. No surprise then that GDP was said to be tracking 6.8% annualized during the quarter. China’s Manufacturing index (PMI) ended the quarter at the strongest level in almost five years. And it’s no surprise that continued timid “tightening” measures have thus far had minimal impact. There were, however, bouts of instability in China’s Wild West money market that portend trouble ahead.

March 31 – China Money Network (Li Dongmei): “China’s announced outbound M&A deals totaled US$23.8 billion during the first three months of 2017, a drop of 75% from US$95.1 billion recorded during same period a year ago, as tightened regulatory controls on capital outflows limited Chinese companies' ability to invest outside of the borders.”

The confluence of a weaker dollar, booming Chinese and global Credit, and latent financial fragilities provided precious metals a nice shine throughout Q1. Palladium jumped 17.1%, silver 14.2%, Gold 8.4% and Platinum 5.2%. The HUI (NYSE Arca Gold Bugs Index) jumped 8.2%. Bloomberg headline: “Metals Enjoy Longest Rally in Seven Years as Low Rates Lure Cash.”

There was yet another facet of the Trump Rally that faded as the quarter wore on: The notion of a fortuitous handoff from monetary stimulus to fiscal policy. Markets were supposed to begin “normalizing.” As central banks pulled back from market dominance, stock picking and active management were to grab some of their advantage lost to the passive index Crowd. We’ll wait to see the percentage of hedge fund and mutual fund managers that beat the SPY for the quarter.

As a market analyst, I saw during Q1 the unprecedented Crowded Trade Phenomenon deepen further. Way too much “money” playing the securities market game – became only more so. 

And while a strong quarterly gain in the indexes is celebrated by the bullish Crowd, the undercurrents must be troubling to many.

The reality is that too much “money” spoils the game. When everyone is Crowded on one side of the king dollar trade, the boat rocks over. When the Crowd gets short the yen, it’s squeeze higher. Short the metals, here comes a squeeze. Heavily long the banks (slam dunk trade), watch out below. Underweight the emerging markets, the Crowd is forced to chase a big rally. 

Long the small caps versus the big caps, and the Crowd has no choice but to unwind the trade and jump aboard the S&P500 index. Run long/short strategies with similar factors to everyone else, and the Crowd is left pulling its hair out. Most importantly, focus on risk and you had no chance of outperforming the market or the passive “investing” Crowd.

And it’s “funny” how this all works nowadays. Inflation has turned up, while central bank monetary stimulus is being turned down. Shorting Treasuries (and sovereign debt) should be a Sure Bet. Yet there’s this Lurking Financial Fragility issue, the Elephant in the Market. So, the bigger global Bubbles inflate, the greater the systemic vulnerability to rising market yields (among other things). Yet the more susceptible risk market Bubbles become to trouble the greater the safe haven bid - and the more downward pressure on market yields. Artificially low yields then work to spur speculation and excess, exacerbating global Bubbles and associated fragilities.

All the “money” slushing around in markets dominated by Deviant Market Dynamics continues to make it difficult for most active managers to perform. And the biggest consequence of this troubling market dilemma? Just more enormous self-reinforcing Bubble flows into ETF index products. For the most part, investors are pleased with Q1 returns. 

What’s not appreciated is the amount of risk that must be accepted to continue playing this game.

March 27 – Financial Times (Miles Johnson): “Hedge fund managers may be criticised for their recent returns but they have consistently displayed a razor sharp sense of timing when it comes to picking when to sell their own businesses. When Och-Ziff, the… hedge fund founded by the former Goldman Sachs trader Daniel Och, decided to sell equity to the public markets it did so near the top of the market in late 2007. Investors in that pre-crisis deal… have since lost more than 90% of their money… So what is to be made of the timing of last week’s news that Eric Mindich has decided to shut his $7bn Eton Park hedge fund and return money to investors from what he called a ‘position of relative strength’? The closure of Eton Park has a symbolic resonance on Wall Street. Once the youngest partner in the history of Goldman Sachs, Mr Mindich left the bank in 2004 to set up Eton Park. It became one of the largest launches in the history of the hedge fund industry and, emboldened by his and others’ success, a whole generation tried to follow him.”

And thanks for checking out our final of four short videos, Tactical Short Episode IV, “The Time is Now" at https://vimeo.com/210719190

Why the Border Adjustment Tax Should Be Killed

The BAT is a bad idea. There are far better ways to shrink the federal budget déficit.

By Gene Epstein    

“Anytime I hear border adjustment, I don’t love it,” Donald Trump told The Wall Street Journal shortly before his inauguration, noting that the proposed border adjustment tax was “too complicated.”

Trump isn’t always right when he makes off-the-cuff remarks such as that, but this time he was. The proposed border adjustment tax is so complicated that even its advocates can’t agree on how its disruptive effects on the U.S. economy will play out, and there’s nothing to love about that. The BAT is a bad idea, and it should be scrapped. And while taking it off the table will bring more red ink to the federal budget, there are better ways to stanch the bleeding than subjecting the economy to the trauma of a BAT.

Despite protestations to the contrary, the border adjustment levy is a tax hike embedded in the program of tax reductions that House Republicans put forward last June under the rubric of “A Better Way.” It’s there, presumably, to help offset the effect of the administration’s planned cuts, since the Republicans’ stated aim is to keep those cuts revenue-neutral. Barron’s fully supports the goal of not adding to deficits that, before too long, will be running above $1 trillion a year, given repeated warnings from the nonpartisan Congressional Budget Office about the risk of a financial crisis, due to exploding debt.

The attraction of a BAT is that it could generate an estimated $100 billion a year in revenue. There may be reasons to challenge that estimate, but we’ll accept it for now. There are, however, better ways to slash the fiscal deficit by $100 billion a year than the Better Way plan, and most fall under the heading of spending cuts.

President Trump has spoken about “waste, fraud, and abuse” in “every agency” of the federal government. Indeed, he promised that “we will cut so much, your head will spin.” He should therefore find plenty to love in our proposed reductions in spending. Just for starters, if all corporate welfare were cut from the budget, as much as $100 billion a year could be saved, about matching the total expected from the BAT.

The president also favors slashing the top rate on corporate income to 15% from 35%. Barron’s has proposed a more modest cut, to 22% (“Cut the Top U.S. Corporate Tax Rate to 22%,” Nov. 26, 2016). The Republican package calls for a reduction to 20%, which is close enough to our original proposal and which we believe should boost revenue rather than shrink it.
A list of potential cuts and revenue enhancements, totaling $200 billion, is in the table at the bottom of this page.

THE BETTER WAY PLAN, as noted, would reduce the top federal tax rate on corporate profits to 20% from 35%—which is all to the good. The proposed tax cut would not only be revenue-neutral; it would probably be revenue-enhancing.

In a study released this month by the London-based Centre for Policy Studies, analyst Daniel Mahoney traces the effect on revenue from Britain’s cuts in the corporate tax rate over a 34-year period. According to his calculations, the take from the corporate tax has added three-tenths of a percentage point annually to gross domestic product since rates were slashed.

Similarly, last year, in calling for a maximum U.S. rate of 22%, we traced the significant decline in the average top rate on corporate income for 19 countries in the Organization for Economic Cooperation and Development, which includes the U.S. and the United Kingdom.

Over 33 years, their average tax take as a share of GDP rose six-tenths of a percentage point.

While that might not sound like much, every tenth of a percentage point of U.S. nominal GDP is worth $18.9 billion. So if revenue from the corporate tax rises by, say, three-tenths of a percentage point, to 2.5%—a conservative guess—that increase would translate into a bonus of nearly $57 billion a year in revenue. That alone gets us more than halfway to the $100 billion value of a BAT.

The idea of a revenue-enhancing cut in the corporate income tax was put forward in 1978, when economist Arthur Laffer was first cited as arguing that some rate decreases could generate enough added economic growth that the government wouldn’t lose revenue over the long run—and might, in fact, even gain revenue. Laffer also noted that most tax hikes generate less revenue than a conventional “static” analysis indicates, and that most tax cuts lose less.
Laffer’s “dynamic” analysis covered all of the behavioral changes likely to result from a cut. To begin with, if the tax collector claims a lower share of income, there is an incentive to produce more income. Second, a lower rate means there’s less incentive to spend time and effort avoiding the tax.

Corporations don’t pay taxes; only people do. And there is a tendency to forget that if a corporation nets more profits as a result of a lower tax, those funds will soon take the form of salaries, dividends, and capital gains, and will be taxed in those forms.

The second factor, less tax avoidance, applies with special force to a rollback of corporate taxes.

As we noted last year, bringing down the top rate to 22% from 35% would dramatically reduce corporate flight to low-tax jurisdictions in the rest of the world.
Following the publication of our article, the CBO released a study confirming that U.S corporate tax rates are among the highest in the world. Among the Group of 20 countries—including Japan, China, Russia, Germany, France, Canada, and the U.K.—the U.S. is No. 1, 3, and 4, respectively, in “top statutory corporate tax rate,” “average corporate tax rate,” and “effective corporate tax rate.” The Better Way plan would narrow this gap significantly and make the U.S. more competitive.
But when it comes to the Better Way plan for cutting tax rates on personal income, Barron’s believes that there would be a loss of revenue even after taking into account behavioral changes. The revenue reduction from the proposed personal income-tax cuts has been estimated, on a static basis, at an average of $98 billion a year. We can assume that dynamic losses would run 10% less, or $88 billion, mainly because lower taxes are likely to encourage people to work.
Still, $88 billion a year is a huge loss of revenue. Barron’s proposes that the Better Way plan consider splitting the difference and going halfway on the tax cut, thus saving $44 billion.
THE REVENUE-ENHANCING corporate tax cut would include a special kicker in the form of the border adjustment tax. The BAT would deny corporations the ability to deduct the cost of imports from their taxable income, while all income earned from exports would be exempt from the 20% levy.
This means that companies selling imported goods in the domestic market would be taxed on the sale’s full proceeds—not just on the profit earned—which could more than offset the gains from the corporate tax reduction. At the same time, as noted, there would be no tax on the sale of exports.
The GOP’s Big Three Key players in the border adjustment tax debate: Senate Majority Leader Mitch McConnell, above, and House Speaker Paul Ryan and President Donald Trump, below. McConnell has said that he hasn’t made up his mind about the levy. Alex Wong/Getty Images

The BAT would bring uncertainty and disruption to the U.S. economy, making it hard to predict whether it really would raise $100 billion annually in revenue. The basic idea is that, because the U.S. imports more than it exports, the export exemption would be more than offset by hitting imports hard. Regardless of how it shakes out, the value of the transactions affected by the BAT is huge.
The U.S. trade deficit—the difference between exports and imports—ran at just 3.4% of real GDP in 2016, much lower than the 5.5% peak of 2005. But the actual gross flows of exports and imports are much larger than the difference between the two flows. Exports last year were valued at $2.2 trillion, or 12.8% of real GDP, and imports at $2.7 trillion, or 16.2% (see chart). Given those magnitudes, the tax plan is likely to require massive readjustments throughout the economy.
That’s why major importers, like Wal-Mart Stores are objecting—and why exporters are clearly pleased. As you might expect, then, the BAT is pitting exporters against importers, creating needless discord at a time when the country is surely suffering from more discord than it can handle.
THE POSITION PAPER for the Better Way asserts that by “exempting exports and taxing imports,” the BAT does “not” consist of the “addition of a new tax.” But of course, the BAT’s designers know that imports normally exceed exports by about $500 billion a year. Apply a back-of-the-envelope 20% to that $500 billion, and you get the hoped-for $100 billion in revenue. So the maneuver of “exempting exports and taxing imports” certainly looks and sounds like a new tax.
The Better Way statement also argues that there is an imbalance in the tax treatment of imports and exports that the BAT must remedy. “In the absence of border adjustments,” it states, “exports from the United States implicitly bear the cost of the U.S. income tax, while imports do not bear any federal income tax cost. This amounts to a self-imposed unilateral penalty on American exports and a self-imposed unilateral subsidy for U.S. imports.”

Ryan strongly supports the tax. Chip Somodevilla/Getty Images

But all other countries impose this “implicit cost” on exports through their own corporate income tax. And since the Better Way would slash America’s top rate to 20%, this implicit cost would finally become competitive with that of other nations.
Some supporters of the BAT like it precisely because it would help exports and penalize imports. The mercantilist view of economics implicit in that aim was discredited in Adam Smith’s 1776 treatise, The Wealth of Nations. And apart from the massive dislocations that will occur if imports shrink, this calls into question whether the projected $100 billion a year in revenue is realistic. As Alan Greenspan once wisely said, “Whatever you tax, you get less of.”
Then again, whether we really will get fewer imports depends a lot on the exchange value of the dollar. Other supporters of the BAT predict that the dollar will respond by appreciating against other currencies, conforming to the dictates of textbook fundamentals. If the dollar appreciates enough, the advantage to exporters and disadvantage to importers will be nullified.

Without getting into the technicalities of how all this would work, we concede that it is all quite possible.
But as currency analysts and traders can tell you, exchange rates are subject to all kinds of forces and can spend long periods flouting textbook fundamentals. So whether the dollar will really strengthen in response to the BAT is anyone’s guess. But even if it does, a much stronger greenback would bring other disruptions. American investors with holdings denominated in foreign currencies would take a huge hit. And America’s tourist industries, which are already hurting from what the Los Angeles Times has called a “Trump slump,” would be hurt even more, as the cost of traveling to the States jumps.
There are other questions. Would the World Trade Organization challenge the BAT? Might our trading partners respond in ways that would be unfavorable to us? The border adjustment tax is an experiment in Rube Goldberg economics that the U.S. can do without.

SINCE REVENUE NEUTRALITY is the goal of the Better Way package, what about making up for the $100 billion a year in revenue that the border adjustment tax is supposed to generate?
Whether this tax really will raise as much as $100 billion depends on how imports and exports respond, which is hard to predict. Also, the reduction in the corporate income tax would probably be revenue-enhancing and could generate more than $50 billion in annual revenue.

The president has declared that “anytime I hear border adjustment, I don’t love it” and has voiced concern that it’s overly complicated. Michael Reynolds/Getty Images
We note that the full title of the House Republican plan is “A Better Way: Our Vision for a Confident America,” which leaves room for a vision that includes cost-cutting, along with tax-cutting.
It’s actually possible to reduce outlays by as much as $8.6 trillion over the next 10 years, as we pointed out in Barron’s Prescription for U.S. Economic Growth” (Dec. 24, 2016).
That discussion revealed much low-hanging fruit. For example, the Medicare system is rife with “improper payments,” which Medicare itself estimates at 11% of its spending in 2016. That’s probably a low estimate, because those who get improperly paid tend to keep these payments hidden. Barron’s calculated that if the improper-payment rate could be halved, it would save more than $400 billion over 10 years.
That would contribute $40 billion a year to the $100 billion shortfall from forgoing the BAT. To that we add $65 billion, and perhaps as much as $100 billion, by eliminating corporate welfare.
The Better Way statement properly criticizes the tax code for being “littered with hundreds of preferences and subsidies that pick winners and losers” and “direct resources to politically favored interests.” Spending on corporate welfare is another form of subsidy that picks winners and losers and directs funds to politically favored interests.
IN A 2012 PAPER, “Corporate Welfare in the Federal Budget,” the Cato Institute identified nearly $100 billion worth of yearly spending on corporate handouts, broadly defined, that could be ended. At Barron’s request, Cato senior fellow Chris Edwards updated the scoring on just 10 of the institute’s 40 categories of corporate welfare and came up with $66 billion in potential cuts.
High on Edwards’ list: farm subsidy programs, which redistribute taxpayer money to relatively rich agribusinesses and landowners. That the farm industry receives subsidies makes about as much sense as channeling funds to the restaurant industry, which could well be riskier than farming, based on its high failure rate. This form of corporate welfare goes back to the Great Depression of the 1930s. But whatever argument might have been made for it then hardly applies today, with the yearly tab currently at $25 billion.
Also on the corporate welfare list: pork-barrel handouts administered by the Department of Housing and Urban Development, totaling $13 billion, which go under the heading of “community development,” and which distribute funds to such recipients as museums, recreational facilities, and parking lots. Whatever one may think about the worthiness of these projects, they are better left to states and localities.
Another $10 billion could be saved by abolishing the Universal Service Fund, through which the Federal Communications Commission subsidizes telecommunications companies, among others. A creation of the Telecommunications Act of 1996, this attempt to pick winners and losers is more unnecessary than ever in this dynamic and competitive industry.
PRESIDENT TRUMP PROMISED to “drain the swamp” of Washington’s special interests. One route toward that admirable goal would be to cut corporate welfare. Trump should repeat his objections to a border adjustment tax that would favor the interests of some businesses over others.

He can help make U.S. corporations great again by weaning them off subsidies and reducing their tax burdens. 

Wall Street's Best Minds

The Big Risk to Stocks Is Economy, Not Politics

Nuveen’s Bob Doll contends that a stock drop could be triggered by one of several economic factors.

By Robert C. Doll 

Here are the key points to the article.
• Stock prices bounced back last week, thanks in part to the strongest consumer confidence level in nearly 17 years.
• Investors are focused on political risks, but we think potential for a near-term economic disappointment is a bigger issue.
• In any case, we remain constructive toward equities and other risk assets over the medium- and long-term.
Following their worst week of the year, U.S. stocks rebounded last week. Investor sentiment was buoyed by a strong consumer confidence report, and the S&P 500 Index managed a 0.8% gain. Small cap stocks and cyclical sectors led the way, and the U.S. dollar advanced.
Jerry Goldberg
Top Themes of the Week
1. March consumer confidence soared to its highest level since December 2000. The Conference Board’s Consumer Confidence Index hit 125.6, its highest level in nearly 17 years. We expect rising confidence to boost real consumption levels in the months to come.
2. Tax reform is key to the pro-growth Trump agenda. When investors refer to the president’s pro-growth agenda, they generally mean regulatory reform, infrastructure spending and tax reform. President Trump has already enacted regulatory changes through executive orders. And we think a major infrastructure package is a low probability at this point. That means tax reform (especially corporate tax reform) will probably be the biggest political economic driver.
3. Failure of the GOP health care plan makes tax reform more difficult. A major component of the American Health Care Act was a $1 trillion repeal of taxes that were enacted as part of the Affordable Care Act and a corresponding set of cuts to Medicaid. Without that baseline reduction, policymakers will be forced to find other revenue offsets, making tax reform more difficult.
4. Investors are also focusing on another possible government shutdown. Congress and the president have until April 28 to pass a 2018 fiscal year budget or a continuing resolution. We think the odds of a shutdown are very low, but unless or until tax reform is passed, the debt ceiling will become an increasing political problem in the second half of the year.
5. The extent and pace of economic growth will be a major driver of equity returns. If one believes the “reflation trade” is continuing and growth is accelerating, equities should fare well. If, however, that trade is ending and the economy is in neutral, equities will more likely be stuck in a trading range.
Economic Growth, Not Politics, Is Probably the Biggest Risk
For some time, we have argued that equities and other risk assets looked overextended following their strong run-up since the election. In recent weeks, equities have been trading sideways and government bond prices have recovered. But we have not seen a significant setback in risk assets or a return to a true “risk off ” environment. Nevertheless, we believe risk assets such as equities and high yield bonds remain vulnerable in the near term, meaning we could see a continued period of consolidation or a more pronounced downturn.
Investors seem to be most concerned about politics as a possible catalyst for a market setback. The debt ceiling issue is resurfacing and real progress is lacking on a 2018 budget agreement. Tax reform may also experience some roadblocks.
President Trump has signaled he will be more involved in crafting tax legislation than he was with health care reform. We expect he and his allies in Congress will create legislation that can be passed.

However, without the baseline reductions that were part of health care reform, any tax bill must be revenue neutral or expire in 10 years in order to avoid a Democratic filibuster. (Alternatively, Republicans and Democrats could come together on a bipartisan bill, but that seems like a remote possibility.) Ultimately, we expect a tax reform bill will be passed, but it will probably be more limited than many hope.
More than politics, the economy probably presents a more probable roadblock for equities. We think economic sentiment may be too high and elevated confidence may make investors vulnerable to downside economic surprises. To be sure, we are not expecting a significant economic slowdown, but the nearly non-stop pace of positive economic data is unlikely to continue. At some point, a setback will likely be triggered by a manufacturing decline, soft oil prices, weakening data from China or some other factor, which could spark a risk-off phase.
Nevertheless, we remain constructive in the medium- and long-term toward risk assets, but are growing increasingly cautious about the short-term Outlook.

Doll is chief investment strategist with Nuveen Asset Management.

A 'Real Bubble' And A Really 'Big Short'

by: The Heisenberg

- One of 2017's biggest "consensus" trades is under (heavy) fire.

- The Fed's "dovish" messaging on Wednesday appears to have caught a whole bunch of shorts offsides.

- And while, as one trader put it, "there’s no immutable law that says crowded trades can’t work if they’re right," it certainly looks like this one may be decidedly "wrong.".

- Pick your side.

So late Friday, I outlined the two competing narratives on how the Fed views the post-hike rally in US equities.
In one camp are those who think the committee got exactly the outcome they wanted. That is, they squeezed in a hike, but didn't disrupt risk assets. The Fed put is alive and well.
That take on things has one distinct advantage: it conforms to common sense. This year's leg higher in equities has been driven by retail flows trying to catch the wave.
Part and parcel of post-crisis Fed policy has been a desire to improve household balance sheets by inflating the value of stock holdings. Setting aside one rather obvious criticism of that approach (i.e. that financial assets are concentrated in the hands of those who were better off in the first place and thus policies designed solely to inflate those assets will by definition exacerbate inequality), that effort has been pretty successful:
Of course real economy prices have gone nowhere comparatively speaking, but that's a debate for another post.
The point is, it certainly looks like the ubiquitous "mom and pop" money is finally buying (literally) the "stocks can only go higher" narrative. Or at least that's the message we're getting from ETF flows.

Remember, the day after Trump's address to Congress on February 28, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) saw $8.2 billion in inflows - the biggest daily inflow since 2014.
Total inflows into equity ETFs sum to $66 billion YTD. As Martin Small, head of U.S. iShares told WSJ earlier this month:
It's unassailable that the retail investor is leading the way this year. If it continues at this pace, ETF growth will smash all previous records.
The last thing you want to do if you're the Fed is undercut that. Confidence is a fragile thing and if you go out and pull the rug out from under billions of retail money that just jumped into an overvalued market, you're likely to do serious damage to sentiment. And let me just tell you, sentiment is running pretty hot:
Ok, so count me among those who think the Fed was willing to err on the side of caution in terms of putting a decidedly dovish spin on the messaging if that meant keeping risk assets buoyant. If the knock-on effect was to ease financial conditions further (i.e. effectively turn a hike into a cut as the charts below illustrate) then so be it.
But as you're no doubt aware, guarding against a risk-off move had consequences for yields and the dollar. Specifically, Treasuries (NYSEARCA:TLT) rallied hard following Wednesday's hike and needless to say, the dollar plunged as falling yields undercut the rate differentials argument that supports the structurally strong dollar narrative.
This has created what I've called a tug-of-war between two competing narratives on rates.
The debate between those who argue that Wednesday's post-Fed plunge in yields has more room to run and those who are sticking with the short Treasurys reco is far more important than any discussion about whether and to what extent the Fed is happy with the reaction the committee got in stocks.
Short USTs was one of the consensus trades heading into 2017. And make no mistake, this is one "big short." As Deutsche Bank writes, in positioning data through Tuesday (so before the Fed), speculators "trimmed their net shorts in aggregate Treasury futures by 14K contracts in TY equivalents led by short covering in FV and TY of over 54K and 104K contracts, respectively."
(Deutsche Bank)
But as you can see, spec positioning is still one-sided. And indeed, as Deutsche goes on to note, "spec shorts as share of open interest was little changed [through Tuesday] at -8.9% and remained at about -3.1 standard deviations away from neutral."
(Deutsche Bank)
Additionally, specs also added to shorts in Eurodollar futures, taking the net position to new record of 2,980K contracts.
(Deutsche Bank)
Again, that's how positioning looked the day before the Fed. So it stands to reason that a whole lot of that money was caught offsides by the sharp repricing lower in yields following the Fed decision. As I politely reminded readers on Wednesday, I told you this was probably going to happen.
So that's what the short Treasury thesis looks like in practice. Now let's take a quick look at how some analysts and traders justify it. First is Bloomberg's Richard Breslow (my highlights):

Active traders are short bonds. I'm warned, therefore, to be careful of some massive rally. I'm skeptical. A market of this size will require a change of perceptions to be bullied for more than a very short amount of time by some short- covering. If people begin to think 10-year Treasuries are going north of 3%, do you really think there aren't enough longs to fill in the bids? 
Crowded trades may indeed have structural buffers built in, may even have short-term corrections from panics, but there's no immutable law that says they can't work if they're right.
That's true. And at least as far as real rates go, Deutsche Bank certainly seems to agree. Here are some excerpts from a piece out Friday called "The 'Real' Bubble" (my highlights):

We see real rates as extremely misvalued if not in a bubble. Real rates are far below (-2pp) levels implied by prevailing GDP growth rates, which have historically provided an anchor. Monetary policy has been the key driver of this divergence. If monetary policy had been set in keeping with its historical reaction function, prevailing growth and inflation would have policy rates at 3.5% today. 
The key to a normalization of real rates is higher market expectations of the speed and eventual level to which the Fed will hike policy rates. Market expectations remain well below the Fed's guidance. But this is typical, with past hiking cycles seeing significant repricings and average price losses on the 10y of -11% (at current duration 120bps on the 10y). The Fed simply sticking to its guidance should see market expectations move up, but this will take a few hikes and is more likely around the June meeting. We expect a more clearly apparent upward trajectory in core inflation later this year to make the Fed more anxious and reiterate or up its guidance. This is more likely around the September or December meetings. Our asset allocation remains underweight duration.
You can add (rumored) ECB tapering/rate hikes, fiscal stimulus expectations in the US, and a Marine Le Pen loss in the French elections to the list of possible catalysts for rising rates. Here's SocGen:
We think the bear-steepening dynamic may find further support from a scenario whereby Trump starts to pivot decisively toward a pro-growth agenda, the outcome of the French elections proves positive for risk sentiment and the March ECB meeting keeps the door open to our economists' 2H tapering scenario.
So that's all fine and good, but as I wrote on Friday, this all depends on your outlook. To wit:
Essentially it comes down to this: do you think the outlook for global growth and inflation supports higher yields or do you not? And if you do, do you think it's at least possible that your outlook, even if correct, could be undercut by a short squeeze because there's a … ummm… let's just call it 3-sigma… short in the belly of the curve that's just waiting to be screwed by huge rallies like we saw on Wednesday.
Which brings us to the counterargument. Here's Bloomberg's Wes Goodman (my highlights):

Two-year break-even rates and oil prices are plunging, underscoring concern the Fed has yet to end the risk of disinflation. 
Benchmark 10-year yields have failed to hold above 2.6 percent, the level bond market guru Bill Gross said will signal the start of a bear market if sustained on a weekly basis. Instead of breaking to higher levels, rising yields are drawing demand. 
Treasuries offer a growing premium over their peers. U.S. two-year notes yielded as much as 223 basis points over like-maturity German securities earlier this month, the biggest spread since 2000 and another reason to favor U.S. debt. 
There will be many different issues to focus on from this meeting - the dot plot, the phrasing around the balance of risks, and any mention of balance sheet management - so the short-term reaction may be volatile. Don't be scared off by any initial yield spike.
Well Wes needn't have worried. Those comments hit the wires on Wednesday morning and as noted above, there was no "initial spike." Indeed, yields did exactly what they did following the last two rate hikes:
Some of what you saw following Wednesday's "dovish" hike was undoubtedly short covering (which, you're reminded, wouldn't show up in the CFTC positioning data cited above). Here's what Barclays (who has a long duration view) said on Thursday:

The Treasury market outperformed its global counterparts over the week despite a Fed hike and reduced political uncertainty in the euro area. The March FOMC meeting was perceived as dovish as investors were likely looking for the Fed to signal the possibility of four hikes this year or at least indicate the possibility of balance sheet reduction later in the year. Short covering also likely exacerbated the rally.

"The Dutch elections resulted in a Eurofriendly outcome with preliminary results showing the incumbent VVD party significantly outperforming Geert Wilder's PVV [causing] the market-implied probability of Marine Le Pen winning the French elections to decline," the bank goes on to note, adding that "Figure 1 shows that real yields fell sharply in the US while rising in the UK and Germany, reflecting these developments."
So again, we see the tug-of-war, and those comments underscore the point made above by SocGen. That is, as political risk wanes in Europe, you'll see long-end rates rise (underpinning underweight duration positions). But the Fed's message pushed in the opposite direction. That is, the dovish slant pushed US yields lower. This juxtaposition is reflected in the chart above.

Here's a bit of further color on why the short Treasurys thesis might be misguided, from Bloomberg's Mark Cudmore (my highlights):

[I] argued that long-end yields would fall after the Fed hike. An 11 basis-point drop in 10-year Treasury yields on Wednesday might seem significant, but it's not in the context of what happened at the meeting. 
Apart from lower commodity prices, solid but not exceptional economic growth, and a lack of runaway inflation, much of my anticipation of a dovish market reaction was based on the fact that the market was very much positioned the other way. 
But Yellen didn't just disappoint the extremely hawkish hopes - she genuinely wasn't hawkish at all. Not only did the median dot plot not rise above 3 hikes in 2017, but the average barely rose. Four hikes weren't even a near miss - it wasn't even on the radar of the majority. 
Everything about this meeting that could surprise dovishly, managed to do so. U.S. yields and the dollar have much further to fall as a result.
If that's true, the 3-sigma Treasury short depicted in the CFTC positioning charts shown at the outset will be caught wrong-footed. And by "wrong-footed" I mean badly offsides.
Bloomberg's Richard Breslow may be right. That is, a market the size of the Treasury market may simply prove too large to be pushed around by some short-covering. But remember how Breslow kind of tries to hedge his comments by saying "if people begin to think 10-year Treasuries are going north of 3%."
Wednesday's Fed messaging made that a big "if".
If the market's underlying assumption about the trajectory of yields gets calibrated lower, well then a short squeeze will simply exacerbate a rally.
At the end of the day this is pretty simple. This is either a "real bubble" (as Deutsche Bank puts it) and thereby a great opportunity to capitalize on a sharp repricing higher of yields by the "big short" we're seeing in the positioning data, or this is a crowded trade that is going to turn into a veritable blood bath if there's a sustained bid for US paper or worse (for the shorts) a flight to safety bid triggered by some kind of risk-off event.

The Dutch Elections and the Looming Crisis

By George Friedman

A class struggle is emerging in Euro-American society.

Geert Wilders, the nationalist candidate for prime minister of the Netherlands, lost the election on March 15. This has brought comfort to those who opposed him and his views on immigration and immigrants. It is odd that they should be comforted. Ten years ago, it would have been difficult to imagine that someone of his views would have won any seats in parliament. The fact that his party is now the second largest in the Netherlands, rather than an irrelevancy, should be a mark of how greatly the Netherlands – and Euro-American civilization – has changed, and an indication that this change is not temporary.

Wilders’ views are coarser than most. He called Moroccans pigs and called for closing mosques in the Netherlands. But more alarming from my point of view is the inability of his enemies to grasp why Wilders has risen, and their tendency to dismiss his followers as simply racists. This comforts his critics. They feel morally superior. But paradoxically they are strengthening Wilders – and his allies in the rest of Europe and the United States. By willfully misunderstanding the movement and attempting to delegitimize the nationalist impulse, they make it impossible to shape a movement that cannot be resisted.

Party for Freedom leader Geert Wilders attends a meeting of Dutch political party leaders at the House of Representatives to express their views on the formation of the Cabinet, on March 16, 2017 in The Hague, Netherlands. Prime Minister Mark Rutte was re-elected for a second term in Wednesday’s general election, which also saw the Party for Freedom become the country’s second largest party. (Photo by Carl Court/Getty Images)

I have written before on the intimate connection between the right to national self-determination and liberal democracy. The right to national self-determination is meaningless without the existence of a nation. And a nation is impossible to imagine without an identity.

There is something that makes the Dutch different from Poles, and both different from Egyptians. Nationalism assumes distinctions.

For Europe, Nazi Germany and the wars of the 20th century were seen as manifestations of nationalism. Without nationalism – or more precisely the obsession with national identity – these things would not have happened. One of the results of this was the European Union, which tried bafflingly to acknowledge the persistence and importance of the nation-state while also trying to reduce the nation-state’s power and significance. The European Union never abolished the differences between nations and their interests, because it couldn’t. In an embarrassed way, Europe acknowledged the sins of nationalism, while clinging to it.

Hitler taught us an important lesson. The balance between loving one’s own and despising the stranger is less obvious than we would like to think. Nationalism can become monstrous. But so can internationalism, as Stalin, Hitler’s soul mate, demonstrated. All things must be taken in moderation, but the need for moderation doesn’t abolish the need to be someone in a vast world filled with others.

Nationalism was the centerpiece of the rise of liberal democracies because liberal democracy was built around the liberation of nations. Liberals in Europe and America did not deny that, but they simply could not grasp that the nation cannot exist unless the people feel a common bond that makes them distinct. The claim was that it was legitimate to have a nation, but not legitimate to love it inordinately, to love it more than other nations, to value the things that made it different, and above all, to insist that the differences be preserved, not diluted.

Nationalism is not based on minor idiosyncrasies of food and holidays. It is the deep structure of the human soul, something acquired from mothers, families, priests and teachers. It is the thing that you are before you even understand that there are others. It tells you about the nature of the world, the meaning of justice, the deities we bow to and the obligations we have to each other. It is not all we are, but it is the root of what we are. Novelist André Malraux once wrote that we leave our nation in a very national way. He meant that even when we try to abandon our national identity, we do so in a uniquely national way. Sitting in a bar in Shanghai, I can tell who is an American and who isn’t. I know mine and those who are not mine.

If I say that I am an American, then I have said something of enormous importance. I am American and not Japanese or Dutch. I can admire these nationalities and have friends among them, but I am not one of them, and they are not one of us. I owe obligations to America and Americans that I do not owe to others, and others owe the same to their nations. It is easy to declare yourself a citizen of the world. It is much harder to be one. Citizenship requires a land, a community and the distinctions that are so precious in human life.

The problems associated with immigration must always be borne in mind. The United States was built from immigrants, beginning with the English at Jamestown. America celebrated immigrants, but three things were demanded from them, two laid down by Thomas Jefferson.

First, they were expected to learn English, the common tongue. Second, they were expected to understand the civic order and be loyal to it. The third element was not Jefferson’s. It was that immigrants had to find economic opportunity. Immigration only works when this opportunity exists. Without that, the immigrants remain the huddled masses, the wretched refuse etched on the Statue of Liberty. Immigrants don’t want to go where no economic opportunities exist, and welcoming immigrants heedless of the economic consequences leaves both immigrants and the class they will compete with desperate and bitter.

In some countries, such as the United States, immigration and nationalism are intimately connected. Since economic opportunity requires speaking English, immigrants must learn English and their children learn loyalty to the regime. It is an old story in the U.S. But when there is no opportunity – as in many European countries – assimilation is impossible. And when the immigrant chooses not to integrate, then something else happens. The immigrant is here not to share the values of the country but as a matter of convenience. He requires toleration as a human, but he does not reciprocate because he has chosen to be a guest and not a citizen in the full sense of the term.

For the well-to-do, this is a drama acted out of sight. The affluent do not live with poor immigrants, and if they know them at all, it is as servants. The well-off can afford a generous immigration system because they do not pay the price. The poor, who live in neighborhoods where immigrants live, experience economic, linguistic and political dislocation associated with immigration, because it is the national values they were brought up with that are being battled over. It is not simply jobs at stakes. It is also their own identities as Dutchmen, Americans or Poles that are at stake. They are who they are, and they battle to resist loss or weakening of this identity. For the well-to-do, those who resist the immigrants are dismissed in two ways. First, they are the poorer citizens, and therefore lack the sophistication of the wealthy. Second, because they are poor, they are racists, and nationalism is simply a cover for racism.

Thus, nationalism turns into a class struggle. The wealthy are indifferent to it because their identity derives from their wealth, their mobility and a network of friends that go beyond borders. The poor live where they were born, and their network of friends and beliefs are those that they were born into. In many cases, they have lost their jobs. If they also lose their identity, they have lost everything.
This class struggle is emerging in Euro-American society. It is between the well-to-do, who retain the internationalist principles of 1945 reinforced by a life lived in the wider world, and the poor. For this second group, internationalism has brought economic pain and has made pride in who they are and a desire to remain that way a variety of pathology.

The elite, well-to-do, internationalists, technocrats – call them what you’d like – demonize poorer members of society as ignorant and parochial. The poor see the elite as contemptuous of them and abandoning the principles to which they were born, in favor of wealth and the world that the poor cannot access.

It is about far more than money. Money is simply the thing that shields you from the effect of the loss of identity. The affluent have other ways to think of themselves. But the real issue goes back to the founding principles of liberal democracy – the right to national self-determination and, therefore, the right to a nation. And that nation is not understood in the EU’s anemic notion of the nation, but as a full-blooded assertion of the right to preserve the cultural foundations of nationhood in the fullest sense.

In other words, the nationalism issue has become a football in a growing class struggle between those who praise tolerance but do not face the pain of being tolerant, and those who see tolerance as the abandonment of all they learned as a child. I began by talking about Hitler, whom no reasonable and decent person wants to emulate. Yet, what made him strong was that the elite held his followers in contempt. They had nowhere else to go, and nothing to lose. Having lost much in World War I and the depression, they had nothing left but pride in being German. And the scorn in which they were held turned nationalism into a monstrosity.

Scorn and contempt are even more powerful a force than poverty. Liberals are sensitive to the scorn directed at immigrants, but rarely to those who must deal with immigration not as a means of moral self-satisfaction, but in daily life. This is not about immigration or free trade. It is about the nation, first loves, and the foundations of liberalism.


Do smart-beta investment funds work?

As with all investment, it’s a question of timing
IN THE world of investing, everyone is always looking for a better mousetrap—a way to beat the market. One approach that is increasingly popular is to select shares based on specific “factors”—for example, the size of companies or their dividend yield. The trend has been given the ugly name of “smart beta”.

A recent survey of institutional investors showed three-quarters were either using or evaluating the approach. By the end of January some $534bn was invested in smart-beta exchange-traded funds, according to ETFGI, a research firm. Compound annual growth in assets under management in the sector has been 30% over the past five years.
The best argument for smart-beta funds is that they simply replicate, at lower cost, what fund managers are doing already. For example, many fund managers follow the “value” approach, seeking out shares that look cheap. A computer program can pick these stocks more methodically than an erratic human. A smart-beta fund does what it says on the tin.

But does it work? The danger here is “data mining”. Carry out enough statistical tests, and you will always find some strategy that worked in the past. It may be that stocks beginning with the letter “M” have outperformed other letters of the alphabet; that does not mean they will do so in future.

According to Elroy Dimson of Cambridge University and Paul Marsh and Mike Staunton of the London Business School, researchers have found 316 different factors that might form the basis for a successful investment strategy.

The best-known fall into four groups—size, value (including dividend yield), momentum (buying stocks that have risen in the recent past) and volatility (buying less-risky shares).

Research by Messrs Dimson, Marsh and Staunton shows that the size, value and momentum effects have worked across a wide range of markets over many decades. The low-volatility effect (for which fewer data are available) has worked in America and Britain over an extended period.

In the case of momentum, the effect is very large. In a theoretical exercise (see chart), an investor identifies the best-performing stocks over the previous six months, buys the winners and sells short the losers (ie, bets that their prices will fall). The exercise assumes it takes a month to implement the strategy each time. In some countries, the return is more than 1% a month; globally, it is 0.79% a month, or nearly 10% a year. That is more than sufficient to make up for any transaction costs.
This is a bit of a mystery. Even if markets are not completely efficient, it seems hard to understand how outsize returns can be achieved by looking at something as simple as recent price movements, without clever traders taking advantage until the anomaly vanishes. One explanation may be that the effect can go sharply into reverse; in 2009 a broad-based momentum approach would have lost 46% in the British stockmarket and 53% in America. Any hedge fund that used borrowed money to exploit the momentum effect would have been wiped out.

Similarly, smaller companies and value stocks have beaten the market over the long run.

Nevertheless, there have been times when such shares have been out of favour for years. The returns from such strategies have been much lower than from momentum (2-4% a year): not enough, perhaps, to induce a patient buy-and-hold strategy among those willing to ride out the bad times.

The obvious answer is to select the right factors at the right moment. The obvious question is how to do so. Relying on past performance is risky. A study* by Research Affiliates, a fund-management group, found that a factor’s most recent five-year performance was negatively correlated with its subsequent return. This is probably a case of reversion to the mean. Stocks that perform well over five years are probably overvalued by the end of that period; those that perform badly for the same period are probably cheap.

Indeed, the publicity given to smart beta, and the money flowing into these funds, will lead to upward pressure on shares exposed to the most popular factors. (Add an extra layer of irony when this applies to momentum stocks.) Investors who believe in the beta mousetrap may find that the rodents have already escaped with the cheese.

* “Forecasting factor and smart beta returns” by Rob Arnott, Noah Beck and Vitali Kalesnik